An oft asked question – how much home loan can I get on my salary ! Astute financial planning is about having the right distribution of your salary between investments, expenses and loans.
As far as loans are concerned, they can easily find their way into an investor’s portfolio in the form of car loans, personal loans and home loans. Talking about the latter – home loans form a major chunk of debt for a person and it becomes very important to understand the factors which decide how much home loan you can get.
Factors which decide how much home loan you can get
Whether you plan to buy a small house or a big bungalow, home loan affordability will always depend on some factors from the below list.
How much down payment you can make.
The size of the home loan.
Your current liabilities/loans.
Your monthly income.
Looking at the list above, you will realize that most of the factors are inter connected. Your monthly income less your current loans is the amount of money you have left each month which you can spend on your living expenses and savings. It is out of this left over money that you can think of taking more loans. If you do not have any loans today, you are well placed.
The total cost of your house and how much down payment you can make to buy it will give you the total size of the home loan.
So the total size of the home loan and your left over money each month are critical inputs to determine how much home loan you can get.
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Example of home loan on salary
Let us check with an example.
Suppose you have a gross monthly salary of Rs 30,000/- out of which you are already paying Rs 7,000/- as Equated Monthly Installments (EMIs). How much home loan you can take if the rate of interest on your home loan is say 10% per annum and the loan tenure is 2 years ?
Start with figuring how much percentage of your monthly gross salary will your particular home loan lender like to see as going out as loans. What this means is that each lender will limit the total amount of loans an individual should take. This obviously includes all types of loans that the individual has.
Generally, lenders limit this between 40% to 55% of your monthly gross salary. They do that so that the rest of the money you can spend on your living expenses and save and invest as well. If you were to take loans that amount to 90% of your salary, where would you get money for expenses ?
To exemplify, if a person’s monthly gross salary is Rs 30,000/- and
- the lender allows 40% of total loans, then the individual can take loans amounting to Rs 12,000/- in total and Rs 18,000/- will be left for daily living expenses and investments.
- the lender allows 55% of total loans, then the individual can take loans amounting to Rs 16,500/- in total and Rs 13,500/- will be left for daily living expenses and investments.
So check first what this percentage figure is with your loan provider. How much home loan you can take depends on this hugely. In our example, consider this to be 40%.
Once you know this, then move to trying to find how much down payment do you need to make for your home. The down payment is usually some percentage of the total price of the house. Today, this figure stands between 15%-25%. It used to be 10% before he 2008-2009 slowdown, but times have changed and many home loan providers (banks) are now pushing for 20% of the total price of the house as down payment.
Knowing this figure is important as it could become a very important decision making point between your affordability of an expensive home or a not-so-expensive-one. In our example, consider this to be 15%.
Recap of the scenario :
- Monthly Total Salary (Rs) : Rs 30,000/-
- Total EMI you can afford (% of total monthly salary) : 40
- Interest rate per annum on home loan (%) : 10
- Loan tenure : 2 years
- EMI’s currently existing : Rs 7,000/-
- How much down payment do you want to make (%) : 15
The revelations on how much home loan you can take :
- EMI allowed is Rs 5,000/-.
- Total price of the house is Rs 6,09,556/-.
- Maximum loan that can be taken is Rs 5,18,123/-.
- Down payment is Rs 91,433/-.
Input your values to check for results.
How much home loan you can get is important for your overall financial freedom.
Check to see what happens if your home loan interest rate increases, which increases the EMI. Obviously, you will be left over with less money for living expenses.
Play around with your monthly gross salary and imagine a scenario where your lady boss cuts your salary by 10%. It could send your household budget haywire.
Think about your EMI if you live on rent. Paying EMI and renting together can cause a huge dent to your savings plan.
Decrease your home loan tenure and check how much home loan you can get.
You can obviously create different scenarios to arrive at how much loan you can take, but the idea is to zero down on the one that will make your home purchase cherishable without hurting your lifestyle.